State Bank of India (SBI) has started moving on acquisition financing, a loan segment which the Reserve Bank of India (RBI) has allowed domestic banks to enter from 1 April.

The country’s largest bank has initiated talks with Japanese lenders to partner with them for funding corporate buyouts.

“We are in discussions with them mainly because they are active in that. But we have no preference for anyone. For large transactions, financing probably will have to be done together,” SBI chairman CS Setty said. 

SBI has the lending cap of Rs 94,000 crore under the RBI’s new merger and acquisition (M&A) guidelines, Setty added.

Last week, the RBI in its final guidelines on acquisition financing said banks would be allowed to finance up to 75% of the deal value while the acquirer would have to bring in a minimum equity contribution of 25%.

The initial approach will be to avoid complex structures such as mezzanine debt and follow simple financing where the acquirer brings in equity and SBI provides the debt, Setty told reporters at the sidelines of the Indian Banks’ Association (IBA) annual general meeting on Friday. 

Since SBI has been working with foreign lenders on the acquisition finance front overseas, conversations have started to explore similar opportunities domestically. 

The start for M&A financing, however, will be slow as banks have to build in systems to handle risks and underwriting transactions have to be performed with caution. 

SBI will soon formulate the procedures on how to go about the acquisition financing business and get the board ratify the policy, Setty said.

Setty also said SBI Mutual Fund will be filing the draft red herring prospectus for the initial public offering (IPO) by March and will look to complete the listing of the asset management arm by September.